21 things to do for negotiating favourable payment terms for import purchase?????

???Background: Are you an import buyer?

As an import buyer, do you feel that you do not have as much information on the goods preparation and shipment execution as the supplier until you collect the goods at your end? What effect do payment terms play through the whole process, on cash flow, trade risks, and goods ownership? What payment term can be more rational and favourable to you?

Having a local trading company or sourcing agent whom you trust and have a close relationship with may be so helpful for the negotiation of payment terms. In this scenario, you may not have a better opportunity to grasp how to work payment terms with your suppliers. Therefore, let’s assume that you import directly from an overseas manufacturer without contacting any trading or sourcing party.

???Question: What are your payment terms for import purchases?

Payment terms include payment amount, payment instrument, payment method, and payment time. Some payment terms rely on 3rd party facilities, mostly as banking facilities, others are conducted directly between the seller and buyer. Let’s call payment terms without 3rd party facility direct payment terms. Although bank collection is useful, these direct payment terms are often processed via TT (telegram transfer), but at different times, such as before shipment, upon shipment, before shipment arrival, at 30, 60, or 90 days from BL date, etc., hence they are more closely related to actual trade process than 3rd party facility payment terms and require different resources, capacities, and supply chain management. Therefore, these direct payment terms may be challenging in some industries and business culture.

From my experience, custom-made orders with short shelf life or performance life, products with competitive technology, etc. would always look out for payment when goods are ready for shipment. When you buy from China, more often, the payment term is a deposit on order, balance amount payment before shipment, via TT (telegram transfer). We call this pre-payment or pre-shipment payment term, meaning you have to pay up the full amount for the goods to your supplier in China before goods depart from China, more often before the supplier confirms shipment booking.

Such payment term incurs different challenges on you as the buyer. Among these challenges, it dries up your cash flow and requires you to have more money in the cash flow for your business. It usually takes 3 to 5 weeks pending the shipping route for you to collect goods to resell or to make finished goods or services locally before you can debt your customers for sales payment. In this case, you need to inject more money because the cash flow cycle is extended with the time needed for goods to depart from China and arrive at your end before you receive the goods to be in a position to carry out actual sales or revenue-generating operations. The point here is that the pre-payment term is one of the least favourable payment terms to an import buyer, although sometimes it depends on the different industrial situation. 

So would you like to avoid pre-payment for your import purchase? What can you do to try to negotiate a payment term with your suppliers? I have had some dramatic experience in talking to a Chinese supplier about payment terms, on behalf of an Australian buyer this year in 2020. The contacts with the Chinese supplier include the salesperson and the business owner. 

???A subject story: When will a Chinese supplier with pre-payment terms become easier?

I am based in Guangzhou, as a representative of our trade finance in Aus, and have been talking since July to the supplier in Guangdong, China, about the payment term. The supplier would not take in and review what I introduced when they had said they would consider it. The supplier contacts indicated that they produce products when the deposit is received, and ship goods when the balance amount is received. Then we engaged with the buyer’s purchase manager in Aus, the buyer’s company representative in China, and my colleague and myself in China, tried different kinds of communication tools, took different rounds for weeks. The buyer was so sincere and told the supplier that the end buyer is a leading retailer in Australasia Bunnings. The supplier boss, the business owner does not speak English and told me that he has lots of buyers to work with, and would not care about the buyer much regardless of the end buyer’s super fame because the buyer would not take pre-payment term when I tried to explain on the phone why the buyer hopes to change payment term to be balance payment upon BL copy only. The buyer company rep in China was available to visit the supplier in person.

This was 1st order the buyer placed to the supplier. We started the negotiation about payment terms when the order was placed to the supplier with deposit paid and goods were being produced because the buyer was in urgent need of the goods. In the end, we failed altogether to change the payment term, and the buyer paid the balance amount before shipment. Can you guess what happened next? The buyer gave up the Chinese speaking supplier? NO. The next order is the same unfavourable pre-payment term? NO. I received the supplier’s contact in Oct to resume the payee onboarding processing.

???Another subject story: An experienced buyer always gets a better payment term?

Here is another story of a different Australian buyer, buying from a long list of Chinese suppliers. Their payment term with a supplier in Guangdong, China is balance payment before shipment. The supplier refused to discuss the payment term even when the buyer’s Executive as decision-maker asked for it. I was curious how the supplier ever received the order from the buyer since they were not willing to have a conversation when I talked to the supplier on the phone on behalf of the buyer for payment terms. The supplier advised me that it is the very 1st order from the buyer, and they only made email contact and a few calls through the way. Then I started to believe that the buyer has been paying all their Chinese suppliers before shipment when I continued to contact other Chinese suppliers on the list.

Guess what? Their supplier in Shanghai gives them a term as balance payment at 30 days after shipment. How did this possibly happen as the way the buyer has approached the supplier in Guangdong? It turned out that they had done things so differently when they founded their business in 2017. They traveled to China to visit suppliers before setting up their own business and have been buying from the Shanghai supplier since then. The supplier told me that they would strive to help the buyer to grow more with their capacity, although they prefer to receive the balance amount before cargo arrives at the destination port since it is already more rational than the pre-payment term, rather than after the buyer collects the goods at 30 days after shipment.

??? Question: What do researchers say about China’s international trade?

The reality of China’s international trade is worth your attention and second thought. As China's export is regarded, in current years, the international trade market is the buyer's market (Wu, L, and Zhao, Y.X, eds., 2016), many foreign trade enterprises have formulated credit standards and credit policies, the use of credit sales (open account) to expand export sales, and increase the competitiveness of enterprises.

??? Question: Where can you start to initiate a conversation about payment terms?

From my experiences and understanding, there are many ways to negotiate payment terms with export suppliers. The following is from my experience since 2015 working with over 500 Chinese suppliers on behalf of buyers in Aus and the EU. Assumingly, they should be a reference for all importing buyers generally, especially for those import buyers buying from China. 

From my experience, you do not have to try many ways to negotiate payment terms. Before you initiate negotiation for payment term, please bear in mind SIX things:

*Timing is more critical. Sometimes, a “YES” just comes out simply when you open your mouth at a better time to ask for a better payment term.

*Personality of your supplier contact is also important given different business cultures. There is more discussion potential with those personalities with business acumen. Negotiation about payment terms is no different in this regard.

*The supplier’s trade experience and management capacity are worth observation at the same time. Different payment terms require the supplier to have corresponding capacities and resources for execution. The more favourable to you, the more challenging for the supplier to process and manage it.

*Your contact point at your supplier should be professional and decision-maker for the payment term and order.

*It is fundamental that you research on Chinese export process and relevant certificates. It will provide background knowledge for you to understand suppliers’ trade experience and capacity. As you could imagine or already know, it is very different from other countries or regions.

* Your purchase team should not be purchase staff only. After all, payment terms are finance technics. It is suggested to have a decision-maker at the start for negotiation for payment terms.

??? Question: What actions can you take to structure negotiation on payment terms?

You need to have structured behavior to follow through with the negotiation conversation. It is not a one-off project for payment terms negotiation. You will always look out for a more favourable payment term with your supplier along with your business development and cooperation. Taking some actions from the following list will put you in a better situation with Chinese suppliers, where a conversation about payment terms can be initiated to identify a more mutually beneficial payment term. 

1. Run a company search on the Chinese supplier, there should be record on google search if they have been doing export sales
2. Build a real contact of trust and “face” as in Chinese culture with different communication tools, audio, video, live steam, team acquaintance, with an engaging conversation taking place
3. Build real cooperation along the way through samples, trial orders, and presenting order planning for a quarter and a year
4. Present a formal intent, as you pay for moulds, or even a holding deposit
5. Share ancillary or accessory tools or equipment for production, installation, or quality control, such as test equipment
6. Talk to the right person with professional experiences and decision-maker authority
7. Have face meeting to deepen the relationship, mutual visits
8. R&D together
9. Offer to pay a slightly higher percentage of order deposit for each shipment
10. Go through shipping docs process together, such as consignee as TO ORDER, and notify the buyer
11. Engage with the supplier in building good contact with the forwarder, arrange shipment workflow together according to Inco Terms such as FOB, CIF, CIP, etc. even better to figure out cargo return process and costs
12. Present professional record: financial statements, tax portal
13. Encourage the supplier to buy a credit report, and even export insurance
14. Adopt a project management approach, purchase contract as a whole agreement including payment term, price, INCO terms, deposit, quantity, quality control, shipment execution, etc. 
15. Build a network with prospective suppliers even you do not have to purchase from them just yet. It is a great way to build trust with suppliers as you have been around for some years.

??? Conclusion: A professional supplier has better payment terms.

Except for some particular industries, most suppliers would consider rational payment terms instead of pre-payment when a sensible relationship takes place between you and your supplier. The issue is that most import buyers do not know that, or just do not make a sensible investment in time and networking to build a relationship to negotiate payment terms, rather being preoccupied with the product quality and features, etc.

In the end, you need to have a reasonable excuse for the payment term if you were unable to change the payment term as you find rational. Otherwise, go ahead, look out for another supplier. Remember, most industries are a buyer’s market when China’s export is regarded. Therefore, your sourcing skills and capacity play a tremendous effect on what payment terms you can have when you import from China. A more professional supplier may be just around the corner when you enhance your sourcing capacity.

?? Hit the following button on my profile to check on my experience in international trade and trade finance. ?? Millie QIU

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??Any questions on buying from China? Email Millie at work @ [email protected]. ??